June 10, 2020 / 11:04 PM / 24 days ago

Bond yield caps remain in market sight after Powell comments

NEW YORK (Reuters) - Federal Reserve Chair Jerome Powell on Wednesday said the question remains open as to whether the U.S. central bank will use yield curve controls, reinforcing market expectations that it is gearing up to do so to stimulate the economy.

As the U.S. economic reopening has prompted a stock market rebound and lifted yields on longer-dated Treasuries, bond market players have argued the Fed may cap yields at specific points on the curve, by buying 2- or 3-year maturities for example, to reinforce its guidance that rates are not going up anytime soon.

In his introductory remarks before Wednesday’s post-policy meeting press conference, Powell flagged that policymakers had a full discussion about employing yield curve controls but for now would continue with its current level of purchases of Treasury bonds and mortgage-backed securities.

“Whether such an approach would usefully complement our main tools remains an open question,” he said. He added that the bank would continue the discussion in upcoming meetings.

“I think they are open to anything and everything but not ready to put (yield curve control) into action. (Powell) wants to save that bullet,” said Nick Maroutsos, co-head of global bonds at Janus Henderson Investors.

U.S. Treasury yields fell following Powell’s remarks, which steepened a part of the yield curve. The spread between the 5- and 30-year yields US5US30=TWEB widened modestly, last up 1.8 basis points to 119 basis points. The spread between 2- and 10-year yields US2US10=TWEB, the most common measure of the yield curve, however, was narrower by 6.4 basis points.

Bank of America analysts said on Wednesday the explicit reference to the study of yield curve control supported a steepening of the 5- to 30-year curve and the meeting in general supported “the need to hedge for the possibility of higher longer-term rates.”

Reporting by Kate Duguid, Jonnelle Marte and Howard Schneider; editing by Megan Davies and Richard Chang

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